Originally published on September 17, 2020 by On Global Leadership
Tags: Colleges and universities, Higher education, Infrastructure investment, Sustainable Capitalism
By Andrew E Olson
Like many of you, I am a beneficiary of economic financing, student loans, to quite the tune. The universities I attended benefited as well. This happened across the country, effectively providing the cash flow for a massive investment in higher education on the promise that the increased education generated would lead to benefits throughout the education and economic systems.
Two things happened:
First, my student loan dollars went to universities, which was great since it meant that millions of us could go to college, get our degrees, and, in many cases, even get multiple masters degrees. The promise was that my investment of time and effort, along with the student loan dollars, would move the world forward for the better.
Second, millions of others did the same thing. Their federal grant and loan dollars went to community colleges, colleges, and universities as well. Universities used this money to invest in new facilities, research buildings, and hire faculty. At face value, it seems like an unassailable societal good, and it should have been, if it weren’t for the law of unintended consequences.
Student loans increased the opportunity for students like myself to afford an education, which meant that colleges had more applicants and more dollars competing for a finite number of spots in university programs. They could choose how best to handle it. There were two general directions to approach the increase in tuition. Some schools invested in capacity by building new buildings, beds, seats, and getting more students in the door - a make-more-slots approach that was favored by state schools and large rural universities. Some schools became more selective for incoming students and raised prices so fewer students could afford to apply. Those universities aimed to capture the most dollars per student they could admit.
Most schools did a bit of both, increasing capacity and raising prices, but the effort played out in very different ways. Universities in rural areas, with more access and lower costs of land, had more ability to expand capacity and take more students. Facilities with a public mandate to provide education and opportunity tended to make investments in capacity as well. Universities in more urban areas, with less access because of more expensive land focused on increasing prices, being more selective, and trying to do the most with what they had. It was the core economics of responding to an influx of financing capital that created a driving force for the growth of universities in the United States. Public universities have expanded enrollments since 1965 by nearly five-fold, while private university enrollments have only increased by 2.5 times.[1]
Started as early as the 1950s, the first student loans led to an increase in science, technology, engineering, and math graduates benefiting from the National Defense Education Act. There was a national consensus: STEM graduates in America were, are, and will continue to be a national security priority and essential for a competitive national economy. By 1965, the Higher Education Act expanded student loans, providing economic opportunity, so people with philosophy degrees could go to school.
The National Center for Education Statistics, a part of the National Department of Education, reports that: [2]
In 1965, tuition, fees, and room and board for a four-year school was enough of a barrier at USD$1,375 dollars per year that the federal government decided to institute federal student loans.
That amount, adjusting for inflation, was a mere USD$9,971 dollars in the 2012-2013 school year (the last year the NCES published statistics on the cited table).
The actual cost for tuition, fees, and room and board rose to USD$23,872 dollars per year on average. An education at a four-year university today would cost USD$95,488.
The critical part of all of this is that a program intended to give everyone an opportunity to attend a four-year university has enabled millions to attend. In 1965, around 8 million students were enrolled in universities. [3] In 2020, that number was over 20 million students. [4] At any one point in time, 2.5 times as many students are in higher education today compared to 1965, [5] even though the population was only 1.4 times large. [6]
It’s safe to say that costs of a four-year degree rose faster than inflation, more than twice as fast, and a decade ago it cost USD$100,000 to get an education in America. All of this may be a moot point, of course. The economics of higher education are being transformed before our eyes by COVID-19. Who knows what the final impact will be on the sector, its economics, and its stakeholders? All is unknown until the world resolves the pandemic and economic crises.
Where do we go from here? There may be no easy answers for the long term, but there are economically efficient ones at achieving goals we set as a society, especially if we’re committed to controlling the costs of higher education. If student loans are intended to ensure national security through the proliferation of high quality STEM graduates, more targeted programs are absolutely necessary. If we want programs to provide economic opportunity, handing someone $100,000 in future financial obligations may not be as tempting as outright grant programs. Price controls seem unpalatable, at least politically, but there may be indications of creative solutions elsewhere.
Here’s one such solution. In the medical world, accepting public payment programs requires accepting the public payment-program fee schedule and waiving any individual liability over that amount. Effectively, if you want the government money, you agree to not bill the student any more than the loan-cap amount. If they adopted this approach, universities would still be free to charge what they want to those not qualifying for aid, but it would function to limit the tuition actually charged to those students needing assistance. In a world in need of increased economic opportunity, there are worse ideas.
Andrew E. Olson is currently the Chief Strategy Officer and Vice President of Finance for Enter Inc., a venture-funded healthcare financial technology company headquartered in San Francisco CA. Having started in consulting, Andrew’s expertise in strategy, finance, economics, and data-science have driven the development of multiple data-science intensive software applications, the development of automation and data-driven operations, as well as building one of the largest sell-side social-impact bond portfolios in the United States.
Endnotes
[2] https://nces.ed.gov/programs/digest/d13/tables/dt13_330.10.asp
[3] A total of 7.92 million students with 3.97 million public university students and another 1.95 million private university students.
[4] Ibid
[5] Ibid
[6] https://www.census.gov/population/estimates/nation/popclockest.txt
With Special Thanks to Sarah Kellogg for comments, contributions, and edits - I would have put her as a coauthor but she’s too modest to accept.
Editorial Note from On Global Leadership
At On Global Leadership, we are interested in ideas that challenge the status quo, or in looking with new eyes at solutions that have been around for decades. This moment in time, ravaged by the coronavirus pandemic and a global recession, requires innovative solutions that can tackle problems such as those being experienced on university campuses across the globe. Facing unprecedented budget shortfalls, higher education institutions are in crisis, and it is a crisis exacerbated by their poorly aligned financing systems. This first piece in our Future of Sustainable Capitalism tranche looks at the cost of over investing in higher education, and what the solutions might be to make colleges and universities more affordable today and in the future. The OGL Editorial Team